El Pollo Loco Holdings, Inc. — Q1 2015 Form 10-Q
Reporting period: Thirteen weeks ended April 1, 2015; compared with the thirteen weeks ended March 26, 2014. Amounts below are in millions except per-share data. El Pollo Loco operated 173 restaurants and franchised 243, across five states.
Key financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $90.4 | $81.4 | +11.1% |
| Company-operated restaurant revenue | $84.7 | $76.2 | +11.2% |
| Franchise revenue | $5.7 | $5.2 | +9.2% |
| Income from operations | $13.0 | $11.5 | +12.7% |
| Net income | $6.8 | $5.5 | +24.1% |
| Diluted earnings per share | $0.17 | $0.18 | Down $0.01 |
| Operating cash flow | $14.3 | $7.6 | +$6.7 |
Operating margin was 14.3% of revenue, compared with 14.1%; net margin was 7.5%, compared with 6.7%. Company restaurant contribution was $18.9 million, with a 22.3% margin versus $16.8 million and 22.1%. System-wide comparable restaurant sales increased 5.1%; company-operated comps rose 3.5% (check average +3.4%, traffic +0.1%) and franchised comps rose 6.2%.
Food and paper costs were 32.0% of company-operated revenue versus 31.5%, and labor costs were 25.5% versus 25.3%. Occupancy and other operating costs improved to 20.2% from 21.1% of company-operated revenue. Adjusted EBITDA, a non-GAAP measure, was $16.6 million versus $14.9 million.
Cash, debt, and liquidity
Cash and cash equivalents were $8.6 million at April 1, down from $11.5 million at year-end 2014. Operating cash flow was $14.3 million; investing outflows were $2.4 million, mainly capital expenditures; financing outflows were $14.8 million, including a $15.0 million revolver repayment. Total debt including capital leases was $150.8 million, including $150.0 million outstanding under the revolver, down from $165.0 million revolver borrowings at year-end. The $200 million revolver had $43.0 million available after $7.0 million of letters of credit. The company reported compliance with its debt covenants. Management said cash, operating cash flow, and available borrowing capacity should cover liquidity needs for at least 12 months.
Changes, outlook, and notable items
- Revenue growth reflected comparable-sales gains and sales from new restaurants, partly offset by prior-year restaurant sales to franchisees and a closure. One company-operated restaurant opened in the quarter.
- Interest expense fell to $1.2 million from $5.6 million, primarily following the 2014 refinancing, repayment of the second-lien term loan with IPO proceeds, and revolver paydown. Management said refinancing reduced annualized interest expense by approximately $6 million.
- Net income improved, but diluted EPS declined as weighted-average diluted shares increased to 38.9 million from 30.2 million. The 2015 tax provision was $4.7 million, an estimated 41.0% effective rate; the prior-year provision was $0.4 million and reflected deferred-tax effects and a valuation allowance. The company had released that valuation allowance in 2014 after concluding deferred tax assets were more likely than not to be realized.
- Management planned 16 new company-operated and 11 new franchised openings for the remainder of 2015, and stated a long-term target of 8%–10% annual restaurant-count growth. Expected 2015 capital expenditures were approximately $36 million: $23 million for new restaurants, $6 million for remodels, and $7 million for maintenance and corporate needs.
- Key cost pressures included higher food commodity costs and workers’ compensation and medical claims. California’s minimum wage was scheduled to rise to $10 per hour on January 1, 2016. The company cautioned that it may not be able to offset future cost inflation through pricing or productivity.
Risks and contingencies
- A former employee’s California labor-law class action alleges wage-and-hour violations. The outcome and potential damages were not determinable; an adverse result could materially affect the company.
- Chicken purchasing commitments were estimated at $30.2 million in the notes; the MD&A separately cites $28.9 million for new twelve-month contracts. Beverage commitments were estimated at $17.0 million. These figures have different stated scopes and should be reconciled.
- The company was contingently liable on four assigned restaurant leases, with potential undiscounted payments of $1.6 million; no liability was recorded. Franchisees are primarily liable.
- Interest-rate exposure was material: a 1 percentage-point increase in borrowing rates was estimated to add $1.6 million in annualized pretax interest expense. Interest-rate caps were in place. The company did not hedge commodity risk.
- Revenue was concentrated in the greater Los Angeles area, which generated approximately 68% of Q1 2015 revenue. Two suppliers accounted for 40% of purchases. Management reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How comparable-sales growth, restaurant openings, and pricing affect traffic and sustained restaurant-level margins.
- Whether commodity, labor, and insurance costs continue to pressure restaurant profitability.
- The impact of the 41.0% reported effective tax rate, tax attributes, and the tax receivable agreement, which requires payment of 85% of realized tax savings to pre-IPO stockholders.
- Revolver availability, covenant headroom, interest-rate exposure, and planned capital spending as the company pursues expansion.
- Developments in the labor class action and clarification of the different chicken-purchasing commitment amounts disclosed in the filing.